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Weekly Trends (September 20 – September 26)

  • 29/09/2021

Macro-environment of the crypto market

How Evergrande affected stock and crypto markets

Evergrande expanded aggressively to become one of China’s biggest real estate developers by borrowing more than $300 billion. Last year, Beijing implemented a new program known as “three red lines” to put a limit on the leverage used by real estate developers. Now, it is struggling to meet the interest payments on its debts.

On Wednesday, it is reported that ​​Evergrande had negotiated privately with holders of an onshore bond to settle a 232 million yuan (equivalent to $35.9 million) coupon payment that is due Thursday. Evergrande also has an $83.5 million coupon payment due Thursday on its U.S. dollar bonds and hasn’t said if it plans to make that payment.

First of all, to Chinese financial market

  • Many people bought properties from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
  • It could also affect Evergrande’s suppliers and financial institutions that do business with the firm. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
  • Real estate developers may be pressured to sell their properties at deep discounts to boost liquidity, causing home prices to fall dramatically.

Second contagion to global financial market

  • The China government’s “three red lines” policy could push companies, like Evergrande, to default, raising fear among international investors. Because many China developers raised funds from the offshore bond markets.
  • Investors and analysts are afraid of the domino effect from Evergande to other real estate companies, to investors, to suppliers, and then to countries that provide commodities to China (coal, iron,…) 

Third to Crypto Market

  • Many analysts believe that Evergrande could have a big impact on commercial paper markets. One possible connection to the crypto market is through Tether as the company holds $30.8 billion in commercial paper and certificates of deposits, accounting for nearly 50% of its assets. However, according to Tether’s spokesperson, “Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so.” Even though Tether says it doesn’t hold commercial paper issued by Evergrande, an upheaval in the commercial paper market could still have wider ramifications, especially in case Tether holds any Chinese commercial papers in general.

Bottom Line 

  • People are scared so they pull back from risky investments either in stock or in crypto.
  • However, Chinese governments won’t allow the Evergrande issue to cause a financial crisis or let it trigger any systemic risks. Some types of bailouts will be carried out, though not for Evergrande. (It is likely that the Chinese government will bail out home buyers).
  • The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. While boosting liquidity won’t solve the Evergrande problem, it helps smooth the nerves as the market worries about Evergrande.
  • Chinese authorities are asking local governments to get ready for a possible store and to step in as the last resort if Evergrande fails to manage its affairs in an orderly fashion.

The Chinese government released detailed documents on cracking down on cryptocurrency. 

The document requires “strict monitoring, strict prevention of risks, prohibition of increments, and proper disposal of existing mining farms”. In addition to Bitcoin and Ethereum, this notice mentions Tether and USDT for the first time. It is not a surprise since China has been cracking down on cryptocurrency for months since early this year. But the FUD still spreads among Chinese crypto holders. They are worried that fiat-transaction will be stopped tomorrow, leading to panic selling off of USDT for RMB, the exchange rate fell from 6.44 to 6.8 RMB/USDT

Binance and Huobi appeared to suspend the registration of new users in mainland China. Huobi has announced that it will retire existing Mainland China user accounts by Dec 31, 2021. It is reported by Twitter account Wu Blockchain that the Chinese community will move to DeFi. In the latest update, Alibaba stops selling mining machines.

Highlight from Gary Gensler interview with Washington Post on cryptocurrency

In short, Gary Gensler expected that regulating cryptocurrencies would require working with other agencies, and that regulation would bring stability to the market and protections to investors.

  • While he expressed support for cryptocurrency: “new technology is generally a good thing; it challenges the establishment”. He also stated that “But I don’t think that new technologies exist outside of public policy frameworks.”
  • SEC Chair Gary Gensler said working with Congress could help regulate “a world of stablecoins.”
  • He expected that the crypto platform would come in and register. If they fail, enforcement is followed. “ I think it would be better if the platforms that are trading securities, the platforms that have lending products… that they come in and we sort through, figure out how best to get them within the perimeter. We’ll also be the cop on the beat, bringing those enforcement actions as well.”
  • “Private forms of money don’t last long”. Gensler analogized the world of cryptocurrency to the Wild West and said stablecoins “are acting almost like poker chips at the casino right now.”
  • Chair Gary Gensler said stablecoins are ‘challenging the established business models.’ “I think [cryptocurrency] has been a catalyst for change… I also think it is raising new and interesting innovations around how exchanges work and even potentially some forms of decentralized lending… challenging the established business models.”

Twitter

Twitter enables crypto tips on iOS. Users can send tips to others with Bitcoin using Strike – a payments application built on the Bitcoin Lightning Network that allows people to send and receive Bitcoin. Strike is available to people in El Salvador and the U.S. (excluding Hawaii and New York). Another way to tip with Bitcoin is via a menu of payment options that include Square’s Cash App and Go Fund Me. In addition, Twitter said that it will support authentication for NFTs, or non-fungible tokens, by letting people connect their crypto wallets. A system for verifying the ownership and provenance of NFTs will likely add fuel to that practice and, in turn, reinforce the NFT ecosystem more broadly. The recent movements of Twitter indicate that the company is focusing on developing “creator economy”.

Segment review

Last week was a week full of uncertainty for the crypto market when investors were afraid of contagion effects from the China real estate market and the Chinese crackdown on cryptocurrencies. The whole market went down with BTC and fell briefly below $40,000. The market recovered later last week with positive news from the US and China. The U.S Federal Reserve signaled that it could begin to reduce its bond purchases soon and raise interest rates as early as next year. (Increase interest rate will help to reduce inflation, which has increased in the past few months. Fed officials expected inflation to average 4.2 percent in the final quarter of 2021 before falling to 2.2 percent in 2022).

Smart Contract Platform

Avalanche

While the crypto market went down last week, Avalanche is one among few projects that had positive returns of 20% (as of September 24). The reasons for AVAX’s positive return are the arrival of AAVE and Curve this week, and the activation of Apricot Phase 4 (Snowman++ and Reduced C-Chain Fees). According to Avalanche founder, Emin Gün Sirer, this change makes Avalanche the cheapest (lowest fees per transaction) and fastest (lowest time to finality) chain.

The Snowman ++ will reduce the contention in the network by randomly enlarging the subset of validators that can produce a block at a given height over time. Contention on the Avalanche increased as with additional usage as the competition for extractable value on-chain intensifies with additional TVL. 

The C-chain fee will be reduced with a new dynamic fee algorithm called “Moderato”. This algorithm targets a specific network utilization over time and adjusts the minimum fee any transaction must pay to be included in a block based on the amount of activity (“gas burned”) over the last 10 seconds. Since AP3 activation, the gas price has averaged ~98.2 nAVAX, a ~56% reduction from AP2.

Recently, Avalanche’s cross-chain bridge transaction activities have gradually decreased and may be affected by the Vee Finance attack. The losses on Vee Finance’s attack were 8804.7 ETH (around $26 million) and 213.93 BTC (around $9 million). This was the second attack targeting DeFi projects on the Avalanche network. On the 12th of September Zabu Finance lost ~$3.2M.

Cosmos (ATOM): The 7D returns for ATOM is 22.8%. Last week, Sommelier announced a research and development partnership with Mysten Labs to increase liquidity transaction speeds and launch smart contract applications on the Cosmos blockchain. Mysten Labs is the developer of Diem (Libra) and Nori for Facebook.

Celo, 7D returns of 45%,  is another blockchain that announced its partnership with Mysten Labs. Following the integration, Celo will become the fastest EVM compatible blockchain in the world. In addition, Celo has announced key hires including Danielle Andrzejewski (from a16z) as head of commerce to focus on international business partnership development; Alberto Martin (from Google) as Celo’s head of product,  Eric Nakagawa (from Facebook’s Novi) as head of developer relations.

DeFi

dYdX and Perpetual Protocol lead the crypto market higher. 

It is predicted that after the Chinese panic, money was withdrawn from Huobi (and other centralized exchanges) and moved to decentralized exchanges and derivatives including dYdX and Perpetual. 7D returns for dYdX and Perpetual Protocol are +56.25% and +36.17%, respectively. For the first time, dYdX is doing more trade volume than Coinbase. dYdX is Ethereum-based on the chain crypto derivatives platform founded by Antonio, after he left Coinbase

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